UBS Global I/O: Miner’s Price Review 28 June 2018UBS Global I/O: Miner’s Price Review Winter Thaw
UBS Research THESIS MAP MOST FAVOREDLEAST FAVORED
Nickel, Copper, Mineral Sands, Iron Ore Thermal Coal, Manganese, Alumina
PIVOTAL QUESTIONS Q: Is the global demand backdrop supportive for commodity prices
We believe Chinese construction activity should moderate into end 2018e, as tight house purchase
rules, higher credit costs & local government deleveraging weigh on incremental growth. But activity
won't collapse due to property inventory drawdown, shanty town redevelopment & 'build to lease'
programmes. Earlier inventory builds in steel, coal, aluminium & copper in 1Q18 have mostly reversed
now, signaling healthy demand-supply dynamics. We are watching trade war rhetoric, but an
uncontained trade war is not our base case – rather is reflected in our downside price scenario.
Q: Can supply reform in China & supplier discipline continue to support prices into 2019e
Yes. Recent announcements from China's government point toward more stringent measures in their
War on Pollution. We believe winter output cuts could be broadened & deepened, as an example.
Capacity reforms continue as well, having been extended to more of China's industrial complex. All
these measures lift industry utilisation rates & increase preference for high quality raw materials, which
will support prices going forward. Produces too have been mostly disciplined, but capex for new
capacity to replace depletion is ramping in selected industries. We believe this will broaden longer
term, particularly in coal, and forms a key plank for our long term coal price upgrades today.
Q: Are cost curves reflating and supporting commodity prices
Yes. Higher actual & expected oil prices have lifted direct and indirect (freight) costs for industry, and
are rippling through supply chains now. Emerging labour shortages are beginning to be reported,
along with stronger demand for mining equipment & related services as replacement & selected new
capacity capex lifts. Some governments as well as workers are also pushing for a greater share of
mining company revenues. In short, we believe cost curves are now starting to reflate.
UBS VIEW Best commodities on risk/return Nickel is our preferred play on a 12 month view. Inventories are
falling, premiums are up & nickel-rich EV battery demand is rising rapidly. Strong battery demand
should hold battery-grade lithium prices firm 12 months out too. Mineral Sands price momentum
endures & remains a preference. Copper is around fair value now but should lift 12 months out
thanks to steady demand growth. Iron ore prices are around fair value, as higher freight, oil & low
grade discounts lift & steepen the cost curve.
EVIDENCE
Demand healthy but to slow to end 2018, meanwhile supply to remain supportive: Pent up
winter demand released through 2Q18 as expected but moving into 2H18, we believe incremental
demand growth should ease, but remain at healthy levels. Meanwhile, China's War on Pollution we
believe might become stricter over time, as industry reform continues, keeping supply tighter. Costs are
starting to lift with higher energy prices rippling through supply chains, potentially pressuring margins.
WHAT's PRICED IN
Most commodity prices sit above costs, but costs are creeping higher: Most commodity prices sit
above the top of cost curves, suggesting excess demand. Even as cost inflation is emerging, these
prices are mostly unsustainable and should ease over time.
Figure 2: Commodity price performanceFigure 3: China construction – property starts lifting
Source:Bloomberg, UBS Research. Source:CEIC, UBS Research.
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CopperAluminium
NickelZinc
GoldIron Ore (62% Fe CFR China
Hard coking coal (Qld FOB)Thermal coal (Newc FOB)
Alumina (WA FOB)Manganese (44% cfr Tianjin
Brent crude oil
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y-1Floor space started (%y/y, YTD)
Infrastructure FAI (%y/y, YTD)
Floor space sold (%y/y, YTD)
Floor space under cons'n (%y/y, YTD)
UBS Global I/O: Miner’s Price Review 28 June 2018UBS Global I/O: Miner’s Price Review UBS Research
OUR THESIS IN PICTURES return
Figure 4: China property & construction activity slowingFigure 5: China credit cycle is tightening…
Source:CEIC, UBS Research.Source:CEIC, UBS Research.
Figure 6: Global manufacturing PMIs – strongest
synchronised growth since post GFC stimulus…
Figure 7: The earlier correlation of iron ore prices and
China steel spreads has broken down…
Source:Bloomberg & UBS estimates.Source:Mysteel, WIND, custeel, CISA, Platts, UBS estimates.
Figure 8: China steel inventories at traders and billet in
Tangshan – back to more normal levels…
Figure 9: China's aluminium inventories appear to have
peaked and are now rolling over…
Source:WIND, Antaike, UBS Research. Source: SFE, Bloomberg.
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y-1Floor space started (%y/y, YTD)
Infrastructure FAI (%y/y, YTD)
Floor space sold (%y/y, YTD)
Floor space under cons'n (%y/y, YTD)
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Interbank Repurchase Rate (7 day, bond collateral, 5d MA)
3mth shibor (5d MA)
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y-1USJapanEurozoneGermany
FranceItalyUKChina
US$ 30/t
US$ 50/t
US$ 70/t
US$ 90/t
US$ 110/t
US$ 130/t
(RMB 500/t)
RMB 0/t
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RMB 2,000/t
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Rebar (RMB/t)HRC (RMB/t)
CRC (RMB/t)Iron ore price (cfr China, rhs)
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Trader inventory
Tangshan billet inventory
Total steel inventory
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1.0 Mt
1.2 Mt
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SFE
UBS Global I/O: Miner’s Price Review 28 June 2018UBS Global I/O: Miner’s Price Review UBS Research
PIVOTAL QUESTIONS return
Q: Is the global demand backdrop supportive for
commodity prices
China's construction will slow but not collapse to end 2018e & into 2019e.
Property build is proving resilient, reflecting i) inventory drawdown driving
more new builds, & ii) shanty town redevelopment (~20% of 2017 build) &
build to lease (~4% of 2017 build). Infrastructure build is slowing as
Chinese credit supply & cost has increased. Yet there remains a substantial
pipeline of infrastructure build that will support activity this year & next.
As China's construction cycle eases, rest of world growth, as evidenced by
trade & IP volumes, PMIs, tightening labour markets & gradual monetary policy
normalisation; remains robust. Europe has cooled somewhat through 2018
but remains supportive. Ongoing recovery in the US signals demand strength.
While less commodity intensive (than China), better rest of world growth is
demand supportive.
Concerns on inventory build in 1Q18 have dissipated as steel, coal, iron ore,
nickel, aluminium & copper inventories have traded sideways or fallen since.
This signals healthy demand-supply balances in many markets.
Instead, trade war concerns have broadened & deepened. The US has
threatened or imposed larger & broader trade protections on more trading
partner which, when implemented, have elicited retaliatory tariffs. Our base
case is no uncontained trade war, but this is a key risk. Uncontained trade
protection will eventually weigh on trade volumes, IP & commodity demand.
EVIDENCE
China's property construction starts remain resilient while new infrastructure
activity cools. Global trade & IP growth is holding near multi-year highs but
could slow with further trade protection measures. Confidence signals such as
PMIs & sentiment indices remain supportive despite some moderation in 2018
YTD in Europe.
Figure 10: China property signals – new construction starts lifting…
Source:CEIC, UBS Research.
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y-1Floor space started (%y/y, YTD)Floor space completed (%y/y, YTD)
Floor space sold (%y/y, YTD)Floor space under cons'n (%y/y, YTD)。